Tagged: Equity

Despite the red flags staring at most Indian banks, mutual fund managers do not seem to bother about them. Reports say that the allocation to the banking sector by mutual funds has reached an all-time high of Rs 1.47 lakh crore at the end of June.
Shishir Asthana | Moneycontrol Research | Jul 28, 2017 06:14 PM IST | Source: Moneycontrol.com

In a recent survey conducted by Moody’s Investor Service, 70 percent of market participants pooled said that India’s banking system was the most vulnerable in South Asia. Stress in the banking system has made headlines for over three years now. Analysts, experts, and economists have all predicted doomsday which has not yet come. However, to be fair to experts the balance sheet numbers of the banks have continuously deteriorated in most of the cases.

Despite the red flags staring at most Indian banks, mutual fund managers do not seem to bother about them. Reports say that the allocation to the banking sector by mutual funds has reached an all-time high of Rs 1.47 lakh crore at the end of June.

Why would funds like to invest in banks which everyone fears will implode? Here are five reasons we think banks are on mutual funds’s radar.

Valuation: Given the current valuation in markets, very few sectors offer a good risk-reward bet. With Nifty over 10,000 and market price-to-earnings in the top quadrant, there are few sectors and stocks that offer value. While Bank Nifty has touched a new high of 25,030, there are stocks in the sector, especially in the public sector space, that offers better valuation but higher risk.

Liquidity: Mutual funds in India are witnessing heavy inflows. New investors and higher investment through systematic investment plan (SIP) is compelling mutual funds to take more risks. Despite record investments in the banking sector, mutual funds are still sitting on cash levels of 5.7 percent on an aggregate basis. Some funds have cash positions ranging between 8-18 percent. Peer pressure and rising markets compel them to invest.

Index weightage: One parameter that every fund manager is ranked on is his performance with respect to the index. As weightage of banking stock in the index is high at near 30 percent, fund managers are compelled to buy banking stocks in order to be close to the index performance.

Too precious to fail: Though asset qualities of most banks are questionable these banks are all too big to fail. For the government and the central bank, it will be very embarrassing to allow a bank to fail. Both the central bank and the government have been trying to recapitalise banks, tweaking the rule books, bringing in new schemes to help banks clean up their books. Bankruptcy law is now cleared and cases are registered. This is expected to go a long way in recovery and solving the problem with bigger non-performing assets. Apart from these measures, the government has also initiated merging of weaker banks with the stronger ones, in turn, creating a bigger and stronger bank.

Proxy for growth: The banking sector has traditionally been considered as a proxy for the economy. Every activity in the economy requires money. Banking sector credit growth has historically been between 2-2.5 times GDP growth. However, with the toxic asset problems and other sources of non-banking finance available in the market, the ratio has fallen to nearly 1.6 times the GDP. This ratio is expected to improve as banks start lending again in line with the growth in the economy.

The stock markets are at all-time highs, and it’s understandable if you are confused whether to invest or wait for correction. Timing the market is not easy. And while piling up your savings or putting them into traditional investment options seems like an easier option, it lacks the growth opportunities which capital markets could present.

A smart investor would look to participate in the growth of capital markets but in conservative manner. Introduce yourself to dynamic asset allocation funds, a smart way to invest in markets without worrying about market highs or lows.

Investing in mutual funds which follows the principle of dynamic asset allocation gives you the flexibility of investing in both debt and equity depending on market conditions. These funds aim to benefit from growth of equities with a cushion of debt. Such funds work on an automatic mechanism switching from equity or debt, depending on the relative attractiveness of the asset class.

In a scenario when the equity market rallies, the fund is designed such that profits are booked and the allocation would shift towards debt. On the other hand, if the markets correct, the fund will allocate more to equity, in order to tap into the opportunities available. The basis for this allocation is based on certain models which takes into account various market yardsticks like Price to Book Value amongst several others for portfolio re-balancing.

This model based approach negates the anomaly of subjective decision making, thereby ensuring that the investment made is deployed at all times to tap into the opportunities of both debt and equity market. The other added benefit is that one gets to follow the adage – Buy low, sell high. For an equity investor, this is one maxim which is the hardest to execute, but this fund effectively manages to achieve this objective.

Also, investing in such funds renders an added benefit of tax efficiency as 65% of the portfolio is allocated to equities. Since this category of fund is held with a long tern view, capital gains on equity investment (if invested for over one year), are tax free, as per prevailing tax laws.

So, while the markets are soaring high, you can consider investing in dynamic asset allocation fund to keep you well footed in the market, even during volatile times.

For secular retail participation in the capital markets, two things are important. One, education about the asset class and two, the confidence in the markets. While institutions are investing in educating the clients, confidence of small investors in markets will be boosted by growth in volume and more broad-based participation.

Longer trading hours will benefit traders and expert participants in multiple ways. Benefits will accrue to smaller participants as well. Here’s how:A. It will increase time overlap with global markets, thereby reducing, to some extent, open gap shocks. Minimising such shocks is good for retail and small investors as it helps reduce the volatility of returns. In a country like ours where retail investors have traditionally invested in FDs or physical assets like gold and real estate, low equity market volatility will be a confidence booster.

B. Extension of trading hours will also help drive volumes which is good for the overall market liquidity, thereby increasing the confidence of smaller participants in the equity markets. As it is evident that more overlap with global markets and increased volume is good for all market participants, extending trading hours is an idea worth exploring.

Sudip Bandyopadhyay Group Chairman, Inditrade (JRG) Group of Companies, says Yes If India is to become a global financial powerhouse and if exchanges are to become truly international, we need to have extended trading hours.

The Indian capital market is significantly influenced by the global markets and global investors. No market participant can deny this influence and co-relation. The most influential global market is the US market. It starts trading long after the Indian markets close.

This creates a peculiar situation which leads to “gap-up” or “gap-down” of opening of Indian markets post any major global event. For the health of any market and its investors and in particular the retail investors, this is definitely detrimental. Extending Indian market hours to align with at least the opening of the US market, will prevent some uncertainties.

Further, Indian financial markets, systems and processes are now robust enough to support long market hours. Both back office processes and banking activities even in normal course, continue far beyond the present market closing hours. Thus, adopting extended trading hours should not pose any operational or banking issues.

If India has to become a global financial powerhouse and if Indian exchanges aspire to become truly international, we need to have extended trading hours. However this can be done over a period of time in phases. At this stage, extending trading hours up to New York opening time, should at least be considered.

Deepak Jasani, Head, Retail Research, HDFC Securities says NoImpact of moves in global stock exchanges do impact the opening levels of Indian markets but in most cases, that effect is overcome in a couple of hours.

For small investors, extended trading hours will not help in any way. The six hours available now for trading are sufficient for price discovery and execution. With mobile trading on the rise, even investors who are occupied at work till evening can track the markets and trade within the trading timings.

Though currency and commodity markets are open till late, this is mainly to allow hedgers/traders to track forex markets or commodity prices abroad. As far as equity markets are concerned, Indian stocks prices do not track any other prices on a minute-by-minute basis. Impact of moves in global stock exchanges do impact the opening levels of Indian stock markets but in most cases, that effect is overcome in a couple of hours.

Exchanges would like to extend time to offer differentiation, gain market share and boost income. Compulsive traders would like extended hours to get more opportunities to trade. Brokers would welcome extended hours provided the incremental revenues are more than the cost in terms of manpower and other running costs.

However, they currently feel that extending trading hours would bring more pressure on them and may not result in much higher volumes and revenues. Markets are trending for 25-35% time and are range-bound/trendless for the balance period. In the latter period, extending the trading hours could prove to be discomforting for all participants.

Sandip Raichura, Head, Retail, Prabhudas Lilladher, says NoA small trader has a defined risk appetite and that doesn’t change because more time is available. He will be looking at price levels, not the time.

Proponents of the benefit of longer trading hours have often justified this by giving examples of the commodity exchanges etc., which work for longer hours. While it may benefit certain segments of investors and traders, I don’t see any direct benefit to smaller investors, at least not immediately.

The small trader has a defined risk appetite and that doesn’t change just because more time is available. The small investor will typically be looking at price levels, and not necessarily the time of day to take decisions. Self-driven clients trading online may possibly do more trades, but that is a conjecture at this stage.

It might negatively affect relationships between small traders and sub-broker or RMs who typically meet in the evenings. This can affect fund flows with cheques not collected in time or that client feeling a deficiency in services if not met regularly.

In fact, brokers might desist from offering sit in or walk in services at low brokerage rates due to the enhanced costs of an extended day and attempt to pass on these costs. What’s most likely is that the same trades are likely to now get staggered over a longer period.

The benefits of an internationally aligned market are more likely to accrue to bigger investors. While European and Asian markets get factored into our markets adequately, the US markets open much later than 5 pm and therefore, it is unlikely that volatility would reduce due to the additional hours.

It has been almost 3 years since the first wave of closed-end funds was launched. From the first such scheme—IDFC Equity Opportunity Fund-Series 1 (IEOF1)—which was launched in April 2013, the Indian mutual funds industry has launched over 100 closed-end funds till date. Collectively, they have collected Rs18,000 crore. Closed-end funds came with a promise of giving better returns than open-ended funds. Although most of the closed-end funds are still serving time, we think it’s a good time to check how they have done so far.

Mixed bag performance
At a broader level, closed-end funds have failed to impress. Over the past 2 years, closed-end funds in the mid-cap space returned 3.23%, while open-ended schemes returned 4.72% (see table). Over the last 2 years, many closed-end funds too have completed 2 years.

Some managers of these funds could claim, with some justification, that their mandate—as defined by the Scheme Information Document—is to beat their benchmark index, not their peers. But did they score on this count?

About 65-85% of the large-cap, multi-cap, mid-cap and small-cap schemes have beaten their benchmark indices. But these numbers aren’t so great numbers if you dig a little deeper. Schemes like Sundaram Select Micro Cap – Series I, Sundaram Select Micro Cap – Series III and Reliance Capital Builder-Series A outperformed their benchmark indices, but came in the bottom quintile of the small-cap category.

Sunil Subramaniam, chief executive officer, Sundaram Asset Management Co. Ltd, said: “I am not sure if our schemes have been compared to the correct set because our micro-cap funds have been very thematic. For instance, our first few series focused on multinational companies, the next few focused on cyclical industries and so on.”

Then, there are schemes that have underperformed their benchmark indices as well as their category averages. “Our scheme’s benchmark index consists of larger-sized mid-cap scrips, while the fund itself goes for small-sized companies. The share prices of underlying companies of the benchmark index have risen (more), as compared to the companies that our fund holds,” says a fund manager of one such scheme who did not wish to be named because he says the closed-end tenure is not yet over and comparing the fund at this juncture ‘wouldn’t be fair.’ He justified the stock selection saying: “Our set of companies do well, typically, when there is a secular bull run, as opposed to flat markets that we’ve seen recently.” Time will tell if his claims come true.

Experts say that closed-end funds have performed in pockets. “Schemes that focus on mid- and small-cap scrips can adopt a ‘buy and hold strategy’ as there is no continuous inflow or outflow,” says Kunal Valia, director, Credit Suisse Securities India.

The challenge of timing
In 2013, when equity markets were at low on the back of policy paralysis, and little government- and private-sector spending on the back of corruption allegations at the time, some fund houses saw an opportunity.

The anticipation was that a new government in the Centre would revive the economy. True to expectations, the Nifty50 went up 29% between June 2013 and 16 May 2014, the day election results were announced.

Most of the schemes launched until then did well. ICICI Prudential Value Fund – Series1 (launched in October 2013) and ICICI Prudential Value Fund – Series2 (launched in November 2013) have returned around 22% and 23% respectively over the past 3-years and are in the top quintile of multi-cap funds. But getting the timing right was not the only factor in their favour. “The outperformance is mainly on account of skill of the fund manager, ability…to identify under-researched and under-owned ideas…and no pressure due to inflows or outflows,” says Valia.

The dividend promise
Some closed-end funds, particularly the earliest ones, aimed to pay dividends as regularly as possible. “During 2007-09, equity markets went up and then crashed. People made profit, theoretically, but never encashed them. The ensuing fall eroded their profits. So when we launched closed-end funds, we decided to book profits and pay dividends as much as we can,” said S. Naren, chief investment officer, ICICI Prudential Asset Management Co. Ltd.

Did they live up to their promise? A Mint study of open-ended and closed-end funds between 2013 and now shows that many of the closed-end funds did pay dividends (see table). If you rank the funds in terms of the dividends paid between 2013 and now, top 13 out of the 20 funds were closed-end.

What should you do?
Manish Gadhvi, head (Mumbai operations), NJ India Invest Pvt. Ltd, one of India’s largest retail mutual fund distributors, says that closed-end funds makes sense if picked well. “Retail investors tend to misbehave on both sides of volatility—upside and downside. If, say within 6 month, markets go up by 30-35%, they redeem. If markets drop by 25%, they redeem. But if you follow a micro-cap stock-picking strategy, your stocks can go up by 200-300%. Hence, closed-end funds aren’t totally a lost cause,” he says.

A big drawback in closed-end funds is the absence of track record, says a senior research analyst at a bank, whose bank had launched some of these closed-end funds, though he claims to have not recommended any: “There is no fundamental research on how this fund has performed. There is no evidence of its performance because there is no past performance.”

It’s too soon to decide whether the current breed of closed-end funds have worked out or not, as the evidence so far is patchy. It’s safer to stick with the tried and tested open-ended funds, which come with a track record—unless a closed-end fund offers something that no existing fund offers.

The business leader said said investing in mutual funds should be as easy as buying smartphones on Internet.
PTI | MUMBAI, JUN 29, 2017 | The Hindu Business Line

Urging regulator Securities and Exchange Board of India (SEBI) to simplify investment and advertisement norms for mutual funds, business leader Anil Ambani today said investing in them should be as easy as buying smartphones on Internet.

He said only one in 25 Indians invests in these products at present, but the investor base can be expanded 10-fold to 60 crore in five years. “India’s mutual fund industry is today poised for its Jan Dhan moment,” Ambani said here at an event of the Association of Mutual Funds in India (AMFI).

Reeling out figures, the Reliance Group chief said while 9 out of 10 Indians have a mobile connection and 3 out of 10 have a smartphone, only 1 in 25 Indians has an investment in a mutual fund. “The comparisons in a global context are even more staggering. There are as many as 58 asset management companies in the world which manage more money than India’s entire MF industry put together,” said Ambani whose group firm Reliance Capital runs one of the biggest fund houses of the country.

He said India’s mutual fund industry is a relatively young industry. “In fact, I would claim it has barely moved out of its teens!” he added.

Recalling that the erstwhile UTI started India’s first mutual fund way back in 1964, Ambani said no private player was there for the next 30 years. “And it is fitting that the man who is widely regarded as the father of capital markets and the equity cult in India — my late visionary father, Dhirubhai Ambani — was among the first to sense the potential that lay ahead.

“We at Reliance, together with my late brother-in-law, Shyam Kothari, shared the exclusive privilege of launching India’s first-ever private sector mutual fund in 1993 — Kothari Pioneer Mutual Fund. Our own offering followed soon afterwards with the launch of Reliance Mutual Fund in 1995,” he said.

“From an AUM of under Rs. 60 crore in 1995, and Rs. 2,200 crore in 2002, we have grown our asset base over 100 times to reach Rs. 2.25 lakh crore. As an AMC, we currently manage Rs. 3.58 lakh crore. In the same timeframe, India’s mutual fund industry, with 5.7 crore individual accounts, has expanded its AUM to reach Rs. 20 lakh crore,” Ambani said.

The industrialist said SEBI has historically played a hugely important and proactive role in the development of the capital markets while safeguarding the interest of the small investor. “It is to our regulator’s immense credit that India is today widely perceived as among the most efficiently run markets in the developing world.

“Going forward, we in the industry need to work closely with you (SEBI) to further simplify the on-boarding process for new investors,” Ambani said while suggesting some steps for the the next 100 days.

His suggestions included making MF investment even simpler, allowing anyone with a legitimate bank account to invest in financial products since their bank KYC is already in place and ensuring better utilisation of technology to improve penetration and facilitate faster transactions.

He also urged SEBI to simplify advertising norms to help communicate the value proposition of mutual funds better. “These steps will bring in a new class of investors to the mutual fund industry,” he added.

Ambani urged the industry to give the nation an increase in the number of individual investor folios from 6 crore currently to 60 crore in five years when India will celebrate 75 years of Independence.

He also termed the GST (Goods and Services Tax) as India’s ‘economic freedom’ while noting that it would make “a borderless world of 1.3 billion people — producers and consumers engaged in a seamless exchange of goods and services, skill sets and capital, labour and ideas”.

He said the world has seen nothing like this before as “in less than 48 hours, India will emerge as the biggest free and democratic market in the history of humankind”.

“In tandem with its policy precursor — demonetisation — GST will forever change the ground rules of doing any kind of trade, commerce or business in India,” he added.

If you want better returns on your investments with relatively less risk compared to directly investing your money in the stock markets, then mutual funds may be a good option for you.
By: Sanjeev Sinha | Published: June 28, 2017 10:31 AM | Financial Express

Despite being subject to market risks, mutual funds are fast emerging as one of the preferred investment options in India. If you want better returns on your investments with relatively less risk compared to directly investing your money in the stock markets, then mutual funds may be a good option for you. Some of the funds, if carefully chosen, even have the potential to double your wealth over the long term.

“This is, however, important to note that every single type of mutual fund category has a different ideal time horizon. And hence, when does your wealth double is a function of the same,” says Vikash Agarwal, CFA, Director and Co-founder, CAGRfunds.

However, for the sake of simplicity we are considering long term as anything above 6-7 years. With that in mind, the following are the best mutual funds across different fund categories:

Large Cap Equity Funds – Invest primarily in large cap stocks.1. SBI Bluechip Fund: With an AUM (Asset Under Management) of approximately Rs 14,000 crore, this has been a flagship fund of SBI Mutual Fund. “This fund currently has over 75% exposure to large cap stocks with the flexibility to invest up to 20% in mid-cap stocks. While this fund was known for a patchy performance till 2011, it has beaten its benchmark by a substantial margin in the last 5 years,” says Agarwal.2. Mirae Asset India Opportunities Fund: Launched in April 2008, this is a relatively smaller-sized fund with an AUM of around Rs 3,800 crore. With around 80% exposure to large cap stocks, this fund has given a 17% returns since launch and is known as one of the most consistent funds within the category.

Multi Cap Equity Funds – Have flexibility to modify their exposure to stocks across large, mid and small cap stocks1. Kotak Select Focus Fund: Despite late entry into the category, Kotak Select Focus has consistently beaten its benchmark with a considerable margin ever since launch. This has resulted in a fast- paced growth and now it has an AUM of approximately Rs 11,000 crore.2. Motilal Oswal Most Focused Multicap 35 Fund: The fund comes from a late entrant in the asset management industry, but as a management team they specialise in equity research. “With their strategy of taking concentrated bets with a long-term horizon, the fund has beaten its benchmark and category in the last 5 years. They have an AUM of around Rs 6700 crore and the fund is being managed by Gautam Sinha Roy,” informs Agarwal.

Balanced Funds – Have a minimum exposure of 65% to equity and the rest in debt instruments1. ICICI Prudential Balanced Fund: One of the oldest in its category, this fund has grown to an AUM size of approximately Rs 12,600 crore. With a diversified exposure across various sectors, this fund has consistently beaten its benchmark.2. SBI Magnum Balanced Fund: With a patchy performance till 2011, the fund has made a strong comeback since 2012. “The fund manager follows a carefully crafted strategy of maintaining a balance between equity and debt exposure. This has helped the fund stay ahead of its peers over the last 5 years,” says Agarwal.

Mid Cap Equity Funds – Invest primarily in mid cap stocks1. Sundaram Mid Cap Fund: Launched in 2002, this fund is one of the best funds when looked at from a long-term perspective. The fund has outperformed the benchmark across market cycles. The fund manager S Krishna Kumar is an industry veteran and specialises in picking quality mid cap names.2. Mirae Asset Emerging Bluechip Fund: Though this fund has a shorter track record (launched in 2010), it has been a consistent outperformer within the category ever since launch. The focus of the fund is to select quality stocks which are relatively larger in size.

Small Cap Equity Funds – Invest primarily in small cap stocks1. Franklin India Smaller Companies Fund: Launched in 2006, this fund has grown to an AUM size of approximately Rs 5,600 crore. “The fund manager is selective about buying growth stocks at reasonable valuations with considerable focus on quality of management,” says Agarwal.2. DSP BlackRock Micro Cap Fund: One of the favourites in the category, this fund has showcased phenomenal performance since launch. Temporarily suspended for any further inflows, the fund currently has an AUM of approximately Rs 5,800 crore.

(These mutual funds have been recommended by Vikash Agarwal, CFA, Director and Co-founder, CAGRfunds. Although due care has been exercised by them while selecting these funds, readers are advised to consult their financial adviser before investing in any of these funds.)

Equity investing have always been associated with high riskiness and the proverbial doom and crash in India
ANUPAM SINGHI | Fri, 16 Jun 2017-07:25am | DNA

Systematic investment plans (SIPs) were first introduced in India about 20 years ago by Franklin Templeton, a global investment firm. SIPs entail recurring disciplined investing via experienced portfolio managers. By necessitating fixed periodic (monthly, quarterly etc.) investments, it makes the timing of the markets, which can be risky, irrelevant, and at the same time, it typically provides above average market returns over a long period. Therefore, SIPs can be relatively less risky and also offer a hedge against inflation risk.

The top SIP funds have consistently given annualised returns of about 20% over the last two decades. The return from SIPs are calculated by a methodology called XIRR, which is a variant of internal rate of return (IRR). In the recent times, SIP fund managers usually tend to invest not more than 2% of the total capital available in a single stock. Portfolios are usually well diversified.

Currently, there are scores and scores of SIP funds to choose from. Different types of SIPs are available to suit an individual’s risk appetite, ROI goals, the time period of investment, and liquidity. Unlike PPF or Ulip, there are no restrictions and penalties on regular SIP payments and withdrawals. Investment can be as low as Rs 500 per month. Retail investors can look to invest in small-cap SIP funds initially, and once their capital builds up significantly, can shift to the less risky large-cap SIPs.

Equity investing have always been associated with high riskiness and the proverbial doom and crash in India. However, the trend is changing in recent times. Increased availability of information about investing, and greater digital marketing, has led to more and more individuals taking the SIP route. The number of SIP accounts has gone up by about 30% in the last 12-15 months alone. SIP monthly inflow volume now stands at about 3,000-3,500 crore, as opposed to about 1,000-1,500 crore in 2013. Retail participation is low India but is bound to increase at an accelerated rate.

Several brokerages are now waking up to the fact that higher P/E ratios are the new normal, as they are warranted by a fundamentally strong economy. Currently, the Indian stock market capitalisation to GDP ratio is approximately 98%, compared to 149% in 2007. With only about 250 Futures and Options (F&O) available out of approximately 4,200 individual securities, shorting opportunities are limited. Increased inflow SIP money could very well drive and support quality stocks in a growing economy.